Some Reasons for The Market Weakness

Another, yes another, snow storm here today. It is March 9th and lady winter will not give up so soon! Leave us alone! On a personal note it is going to be my Birthday later this week. Time keeps on trucking.

More Economic Terrorism
By now I am sure most readers have seen this piece that came out today concerning AIG threatening all kinds of systemic risk and demanding bailouts without end on their own term sheet. Totally disgusting. Outrageous.

I could excerpt the piece, but I do not want to put a fist through the computer screen. I would direct you to this post from February 19th that sums up my position on things.

I would add that this story really makes the members of congress look pretty ridiculous. While they like to parade executives on CSPAN and ask dumb questions as to give the illusion they have any say on matters, the truth is they are given their marching orders FROM Wall Street. They continue to follow directions no matter the cost to the US taxpayer. Sad.

Some Reasons for The Market Weakness
Another down day for the markets. While we have not seen anything approximating a real "capitulation" sell off, the slow grind down has been pretty stark. In a bear market everyone loses and this has been no different. If you are long you have been halved, if you are short you have to be on top of your positions AT ALL TIMES or vicious rallies and crazy one day moves can hurt you. Capitalist Preservation is having hard time identifying trades to make as this market is rough.

Let us discuss some possible reasons for the current mess. Some will be deadly obvious, while some are more subtle. All are not entirely independent of each other and none are the sole reason for the continued downdraft.

Earnings are both shrinking and unknown quantities
Estimates for S&P earnings are contracting at a record pace and are still probably too high. While I would argue earnings have little to do with stock prices usually (nobody cares when things are good) this time the E of P/E ration is a minuscule number. Add to this the great unknown that are bank earnings (losses) going forward for YEARS (as they will have to pay back TARP, bailouts, convert shares by government) and you have a real mess.

Technicals are Bad
I am not a huge fan of technical analysis, especially at inflection points, but they are what they are. While the markets reach big "oversold" conditions rallies are small and far in between. Looking over many charts I would offer that fully 90% of stocks are ugly in a technical sense. Most 6 month charts I looked at were total "skip it" in character. I myself seldom short as I cannot do anything about my positions until after hours. But even shorting here is fraught with risk due to whipper days (see BAC in today's action).

The Market is playing chicken with the government
Look, we know what the financials want from the US government. A total and complete guarantee of their bad assets, recapitalization, minimal regulatory additions, and a blind eye to their actions. I feel that a key factor at play in the markets right now is that the big money players are playing chicken with the government. They are trying to bleed the markets as low as they can as to get a desired policy action. Witness the AIG threats as proof. The balance is to create fear, but not panic. So far mission accomplished.

Many market participants have said "No Mas!"Be it foreign wealth investors, retail investors, regular buyers of stocks, or whomever the staggering loses of the past 8 months is bound to make people gunshy. A 10% correction may be a good buying opportunity. A 20% correction maybe even better. A 50% retracement wipes out an entire decade of gains and that is pretty scary.

Deleveraging and lack of game rules mean many do not want to play
Deleveraging will become the term most associated with this era. Too much debt and too much leverage are being unwound. This process will take years. Add to this how the government continues to change rules piecemeal and without rational and you have a situation where nobody wants to play a game with no ground rules.

There are many others I can think of. Use the comments section to add some thoughts you may have.

I am stunned at the current market levels. I am more shocked that we have yet to face "the moment" I have written about a few times. Denial still runs high, and many still think buying 6 months to a year will magically fix all that is wrong. That viewpoint will die off sometime this summer. Maybe then we will get some direction.

Have a good night.